The $USD and USO / Oil

Rather than post all of the same charts again, please see last Friday's $USO / $USD Update.

The gist is, the $USD and oil, as a $US Dollar denominated asset, have an inverse correlation...

For years I have said that bear market , counter trend rallies (for a rally to be counter trend it must by definition be in a prevailing downtrend) are some of the strongest rallies you'll see in ANY market.

As for this move, the prevailing trend in the $USD has gone from a strong uptrend under the expansion of the $USD-based carry trade to a strong 3C negative divergence followed by lower highs and lower lows which is the definition of a downtrend or most certainly a trend reversal.

 Daily $USDX 3C chart with stage 1 base/accumulation, stage 2 mark-up/rally, stage 3 top/distribution and now stage 4 decline.

Note the 3C positive divergence at stage 1, the confirmation at stage 2, the negative divergence at stage 3 and the leading negative daily divergence (strongest) at the current decline.

The yellow hash marks show the $USDX making lower highs and lower lows as the trend has now changed.

For a closer look since the daily $USDX's top to the left, we have seen a trend lower and a counter trend rally in the $USD at the yellow arrow with the first 7-days (the two small yellow arrows) putting in the strongest 7-day move in the $USD since 2008! Stronger than any 7-day move during the entire uptrend or bull market. IT is this counter trend bounce in the $USD that I believe is ending as I posted on in some detail in last night's Daily Wrap.

While any trend is allowed to and even expected to consolidate, this is not the normal, healthy trend, it's more akin to a short squeeze. With only a day's evidence, it's really too early to be calling an end to such a bounce, but I have a feeling that we'll have enough evidence in the next several days that a warning post is worthwhile.

As I pointed out last night, the daily candlestick pattern in the $USD turned negative after it made a new high early in the morning and failed to make a higher high since.

As of yesterday, I pointed out the Doji star closing candle in the $USD daily chart above with its new intraday high at the white arrow and no new higher high since. Not only is the Doji star a possible downside reversal candle, but it falls within the body of the previous day's candle making it a stronger Harami reversal candle and today's red candle is looking like a bearish engulfing confirmation candle.

This should, if I'm correct, send the $USD down to a new lower low within its downtrend.

The 60 min $USDX chart which doesn't show all of the history since our April 2nd $USD forecast that called for a bounce to be followed by a much larger decline  We saw the bounce (which is now cut-off the left side of the chart) and the much larger decline has taken place at the red arrow since. The counter trend bounce is at the yellow arrow and note the tell-tale rounding reversal top. Perhaps we get a chimney head fake move here as well, perhaps not. I am however expecting the last low at the horizontal red trend line to be taken out with a new lower low eventually that has implications for oil, but more importantly for the Carry trade and ll assets purchased with carry proceeds including bonds and stocks, although bonds have already wrung out plenty of the excesses...

Treasuries which outperformed even equities in 2014 have already made lower highs and lower lows wringing out some of the carry trade excesses, CAN WE SAY THE SAME OF STOCKS YET?

It's hard to say whether there's a head fake/Chimney move in the $USD...

So far we have these charts showing deterioration of the rally...

 The 3 min $USD chart shows the negative divergence at yesterday morning counter trend rally highs.

The 15 min chart shows the accumulation at a "W" base, confirmation on the up-trend and a negative divergence across the highs. Again, this isn't a lot of evidence, the 60 min and daily charts have been negative since the start so they don't add new information, but I suspect we are either at the top or within days of it, again having some correlation as far as time with other charts in the market averages and VIX futures.

As to oil, I'll give a brief summary. I believe oil is creating a large base from which it will reverse its trend...

Daily CL / Brent Crude Futures with a 3C negative divergence at stage 3 top/H&S top, confirmation at stage 4 decline and a positive divergence now at stage 1 base.

More specifically, I believe USO has created a base, but is not done with it yet and needs to pullback 1 more time to create a strong enough base for a true primary trend reversal.

 USO daily chart base. I believe USO needs to pullback within the base and we should see accumulation in to that pullback. Then USO should be ready for a large trend trade long, the best trade opportunity in oil since the decline from last summer's highs.

The 2 hour $USO 3C chart shows the accumulation of a head fake/stop-run below base support which can be seen above on the daily chart as a "V" in the middle leading to a +30% run just above base resistance, but it failed to breakout convincingly as we had forecasted about a week before the breakout attempt came to pass.

This divergence tells us USO needs to pullback, gather a head of steam and pull off a proper breakout.

The 15 min chart shows the details of both head fakes below and above the base. This is the entire reason for our USO short which is at a +6% gain with no leverage...

 USO short position for the pullback.

As the pullback has already started, this 10 min chart is already showing us the accumulation we expected to see and a prerequisite to any long trade. We want to make sure the pullback is being accumulated for a strong breakout before entering long, initial signs are that it is being accumulated in to lower prices.

The 3 min chart shows this with more detail, but not as strong of a divergence.

As does the 2 min chart.

An the 1 min chart suggests USO will pullback some more.

I suspect that by the time $USD has started trending down, USO/Oil will start trending up and as a new low is made in the $USD, oil will make its breakout.

Unlike the last head fake/stop run leading to the +30% move, the next base should be wider than the "V" base last seen. either an inverted Igloo/Chimney or a "W" base so I expect some reversal process, not just a sudden move higher, which should give us plenty of time to enter the trade.

Again, the turn down in the $USD which will come eventually has more serious market implications than simply oil, but this is one that seems to be confirming what we are seeing in the $USD.